The grand reopening of the world economy, scheduled for this summer as vaccination campaigns ramped up over H1, sadly turned out to be let-down. The spread of the Delta variant led many countries to slow or pause their reopening plans, and as a result the handover of economic growth from goods to services didn’t materialise. Furthermore, ongoing supply constraints impacting various industries have put the brakes on growth. So what next after this summer of discontent?

Is the sun rising on the ‘Fed put’ party…

Since their June meeting, the Federal Reserve (Fed) have continually reminded markets that they are keen to normalise policy, openly discussing hawkish plans for both tapering and rate hikes. Market behaviour has indicated some scepticism about that, which is understandable because of the persistent historic validity of the ‘Fed put’, which is the idea that the Fed will do everything within its power to keep the party going for risk assets. As each Fed meeting reiterating and reinforcing tapering and their normalisation plan comes and goes, however, markets may be forced to accept that the sun is coming up and its long party is over. But the Fed has pivoted dramatically before, and it isn’t too late for them to do so again.

… or is central bank hawkishness a mistake?

The rise in long dated forward inflation since the pandemic lows in March 2020 has been one of the more surprising trends over the last couple of months. This rally has extended to such an extent to take even the 15y15y Euro inflation pricing to its highest level since early 2019 and above 2%. Therefore the market is pricing longer term inflation in Europe at historically more “normal” levels even allowing for when the current supply-side constraints ease.

 

Our view is that worries around a growth slowdown and the rise in Delta cases have made the Fed’s hawkish surprise in June look unnecessary in retrospect. The views of many members of the Federal Open Markets Committee are probably skewed by their early life experiences when inflation was high, and the combination of the expected growth profile and elevated pricing levels across the economy plainly spooked them in June.

 

Whether or not the Fed persists with early rate hikes remains to be seen, and if they do proceed we’d expect them to do so slowly. It is notable how other central banks are now shifting away from extremely easy policy too – e.g., the Bank of England is now expected to raise rates in early 2022 , while the European Central Bank will slow its bond buying programme . The timing of this makes more sense to us, as we do see growth sentiment bottoming after the summer slowdown and improving into 2022. Transitory inflation likely will remain sticky and, as it slowly falls, it will meet cyclical inflation on the rise presenting trickier times for markets and central banks.

 

For our part, we were bearish about fixed income at the start of the year, and used the flexibility of the Jupiter Strategic Absolute Return Bond fund to position the portfolio accordingly, moving to an outright short duration position across all major markets and reducing the US dollar short position in time for the February sell-off.

 

Nothing has happened since then to change our bearish view on fixed income, and indeed the subsequent hawkish shift from central banks strengthens our conviction. We believe that global bond yields are still too low and will start to sell off from the long end, accompanied by a somewhat weaker US dollar that will augment the case for emerging markets. As ever, the macro backdrop is highly dynamic and our investment process is set up to be proactive in positioning for where we see the environment moving.

When the facts change, what do you do?

Dynamic and speedy asset allocation, and the ability to take short positions, are cornerstones of how we manage the Jupiter Strategic Absolute Return Bond fund. The starting point is our macroeconomic view, both on a strategic and tactical level, which the team reassess as a continual process. As our view of the macroeconomic backdrop changes, so the portfolio must reorientate around that. To paraphrase Paul Samuelson’s famous quote: when the facts change, we change our mind.

 

The way we think about risk in this context comes down to the construction of the fund. We are volatility targeters, aiming for an average volatility of around 5% for the fund. When we come to construct the portfolio we use risk budgeting to allocated risk to each individual position and from there the appropriate position size.

 

By controlling risk in this way, and using all the flexibility at our disposal to shift between any fixed income asset as well as currencies, either long or short, across both developed and emerging markets, we seek to smooth the return profile over the cycle. Ideally, the result will be outperformance when the markets have a bad time, although when there is a bull market we’re unlikely to fully capture it, but over the cycle our goal is to generate superior returns. We’re proud to say we have delivered that for the fund’s investors so far.

Fund vs benchmark (Federal Funds Effective Overnight Rate)1

Fund vs benchmark (Federal Funds Effective Overnight Rate)

Past performance is not a guide to future performance. The value of investments can go down as well as up and is not guaranteed.

1Source: JAM, Bloomberg, 25.05.17 – 31.08.21. NAV to NAV, gross income reinvested, net of fees, in USD.

2The benchmark since 25.05.17 is the Federal Funds Effective Overnight Rate. Performance prior to May 2017 was achieved under circumstances that no longer apply and no index is available to provide a useful comparison of the fund between prior to and after that date. With effect from 01.08.16, Mark Nash became the Fund Manager. This share class has an extended track record based on the F1 USD Acc share class. On 25.05.17, the fund’s benchmark changed from the JP Morgan Global Government Bond Index USD hedged, to cash (USD – Fed Funds Effective Overnight Rate).

In modern fixed income markets you need to do something different

The challenge that fixed income investors, and those who allocate to fixed income assets, face is that real yields are incredibly low. In our view the reality is that they will stay low for a very long time. So where do you try to source returns in such an environment?

 

One approach is to go down the quality spectrum in search of higher yields – a valid move if one’s due diligence is up to the task of avoiding land mines, but it’s not the approach we take. Our preferred route is to rely on flexibility to help us generate returns. By capitalising on our broad opportunity set, continuously reinventing the portfolio and putting risk management at the forefront of our investment process, we believe the Jupiter Strategic Absolute Return Bond fund is the place to be for those seeking an alternative approach to fixed income.

Past performance is no indication of current or future performance, doesn’t take into account commissions and costs incurred on the issue/redemption of shares.

Source: Morningstar, NAV to NAV, gross income reinvested, net of fees, in USD, to 31.08.21. * Since inception: 30.05.2014. ** Since FM inception: 01.08.2016.

1 Market expectations for Bank of England rate rise shift to early 2022 | Financial Times
2 ECB to slow bond-buying as Europe’s economy improves | Financial Times (ft.com)

The value of active minds: independent thinking

 

A key feature of Jupiter’s investment approach is that we eschew the adoption of a house view, instead preferring to allow our specialist fund managers to formulate their own opinions on their asset class. As a result, it should be noted that any views expressed – including on matters relating to environmental, social and governance considerations – are those of the author(s), and may differ from views held by other Jupiter investment professionals.

Important Information

The value of investments and the income from them may go down as well as up and investors may not get back any of the amount originally invested. Because of this, an investor is not certain to make a profit on an investment and may lose money. Exchange rate changes may cause the value of overseas investments to rise or fall. This document is intended for investment professionals* and is not for the use or benefit of other persons, including retail investors.

 

Investment risk – while the Fund aims to deliver above zero performance irrespective of market conditions, there can be no guarantee this aim will be achieved. Furthermore, the actual volatility of the Fund may be above or below the expected range, and may also exceed its maximum expected volatility. A capital loss of some or all of the amount invested may occur.

 

Emerging markets risk – less developed countries may face more political, economic or structural challenges than developed countries.

 

Credit risk – the issuer of a bond or a similar investment within the Fund may not pay income or repay capital to the Fund when due. Bonds which are rated below investment grade are considered to have a higher risk exposure with respect to meeting their payment obligations.

 

CoCos and other investments with loss absorbing features – the Fund may hold investments with loss-absorbing features, including up to 20% in contingent convertible bonds (CoCos). These investments may be subject to regulatory intervention and/or specific trigger events relating to regulatory capital levels falling to a pre-specified point. This is a different risk to traditional bonds and may result in their conversion to company shares, or a partial or total loss of value.

 

Bond Connect Risk – The rules of the Bond Connect scheme may not always permit the Fund to sell its assets, and may cause the Fund to suffer losses on an investment.

 

Interest rate risk – investments in bonds are affected by interest rates and inflation trends which may affect the value of the Fund.

 

Liquidity risk – some investments may become hard to value or sell at a desired time and price. In extreme circumstances this may affect the Fund’s ability to meet redemption requests upon demand.

 

Derivative risk – the Fund uses derivatives to generate returns and/or to reduce costs and the overall risk of the Fund. Using derivatives can involve a higher level of risk. A small movement in the price of an underlying investment may result in a disproportionately large movement in the price of the derivative investment. Derivatives also involve counterparty risk where the institutions acting as counterparty to derivatives may not meet their contractual obligations.

 

Currency risk – the Fund can be exposed to different currencies. The value of your shares may rise and fall as a result of exchange rate movements.

 

The Fund may be more than 35% invested in Government and public securities. These can be issued by other countries and Governments. Your attention is drawn to the stated investment policy which is set out in the Fund’s prospectus.

 

This document is for informational purposes only and is not investment advice. Market and exchange rate movements can cause the value of an investment to fall as well as rise, and you may get back less than originally invested.

 

Every effort is made to ensure the accuracy of any information provided but no assurances or warranties are given. Issued in the UK by Jupiter Asset Management Limited, registered address: The Zig Zag Building, 70 Victoria Street, London, SW1E 6SQ is authorised and regulated by the Financial Conduct Authority. Issued in the EU by Jupiter Asset Management International S.A. (JAMI, the Management Company), registered address: 5, Rue Heienhaff, Senningerberg L-1736, Luxembourg which is authorised and regulated by the Commission de Surveillance du Secteur Financier.

 

No part of this commentary may be reproduced in any manner without the prior permission of JAM.

 

*In Hong Kong, investment professionals refer to Professional Investors as defined under the Securities and Futures Ordinance (Cap. 571 of the Laws of Hong Kong).and in Singapore, Institutional Investors as defined under Section 304 of the Securities and Futures Act, Chapter 289 of Singapore. 101025

 

IN AUSTRIA, FRANCE, ITALY, LUXEMBOURG, PORTUGAL AND SWEDEN: This communication is issued by Jupiter Asset Management (Europe) Limited, The Wilde-Suite G01, The Wilde, 53 Merrion Square South, Dublin 2, D02 PR63, Ireland.Jupiter Asset Management (Europe) Limited is registered in Ireland (company number: 536049) and is authorised and regulated by the Central Bank of Ireland (number: C181816).

 

IN TAIWAN: This communication is intended only for Capital Gateway’s internal use, and should not be distributed externally. It is for educational purposes only and not an offer to invest.

 

IN THE UNITED KINGDOM AND ALL OTHER EEA COUNTRIES: This communication is issued by Jupiter Investment Management Limited, The Zig Zag Building, 70 Victoria Street, London, SW1E 6SQ, United Kingdom. Jupiter Investment Management Limited is authorised and regulated by the Financial Conduct Authority (FRN: 171847).

 

This communication provides information relating to the Jupiter Strategic Absolute Return Bond Fund (the “Fund”), which is a sub-fund of Jupiter Asset Management Series plc. Jupiter Asset Management Series plc is an investment company with variable capital established as an umbrella fund with segregated liability between sub-funds which is authorised and regulated by the Central Bank of Ireland pursuant to the European Communities (Undertakings for Collective Investment in Transferable Securities) Regulations 2011, as amended. Registered in Ireland under registration number 271517. Registered office: 33 Sir John Rogerson’s Quay, Dublin 2, Ireland.

 

Jupiter Asset Management (Europe) Limited and Jupiter Investment Management Limited are collectively known as Jupiter.

 

Jupiter uses all reasonable skill and care in compiling the information in this communication which is accurate only on the date of this communication. You should not rely upon the information in this communication in making investment decisions. Nothing in this communication constitutes advice or personal recommendation. An investor should read the Key Investor Information Document(s) (“KIID”) before investing in any sub-fund of Jupiter Asset Management Series plc. The KIID and the prospectus can be obtained from www. jupiteram.com in English and other required languages.
Certain paying and/or information agents have been appointed in connection with public distribution of the shares of Jupiter Asset Management Series plc in certain jurisdictions. Shares are sold by prospectus only. The prospectus, KIID and/or other relevant offering documentation is available free of charge at:

 

Austria: Erste Bank der oesterreichischen Sparkassen AG, Belvedere 1, 1010 Wien, Austria.

 

Belgium: CACEIS Belgium SA, B-1000 Brussels, Avenue du Port 86 C b320, Brussels.

 

Germany: GerFIS – German Fund Information Service UG (Haftungsbeschränkt), Zum Eichhagen 4, 21382 Brietlingen, Germany.

 

France: BNP Paribas Securities Services, Les Grands Moulins de Pantin, 9 rue du Debarcadère 93500 Pantin, France.

 

FOR HONG KONG PROFESSIONAL INVESTORS ONLY: This document is only available to specific recipients and should not be redistributed. The document is limited to access by “professional investors” as defined under the Securities and Futures Ordinance (Cap. 571 of the Laws of Hong Kong) and not for retail public of Hong Kong. The document has not been reviewed by the Hong Kong Securities and Futures Commission.

 

Italy: Allfunds Bank S.A.U., Milan Branch, Via Bocchetto, 6, 20123 Milano, Italia; Societe Generale Securities Services S.p.A, Via Benigno Crespi 19A – MAC2, Milan

 

Luxembourg: BNP Paribas Securities Services, Luxembourg Branch, 33 rue de Gasperich, L-5826, Grand Duchy of Luxembourg.

 

Sweden: Skandinaviska Enskilda Banken AB (“SEB”), Kungsträdgårdsgatan 8, SE-106 40, Stockholm, Sweden

 

Switzerland: First Independent Fund Services Ltd., Klausstrasse 33, CH-8008 Zurich is the Swiss representative and BNP Paribas Securities Services, Paris, succursale de Zurich, Selnaustrasse 16, CH-8002 Zurich is the Swiss paying agent.

 

FOR SINGAPORE INSTITUTIONAL INVESTORS ONLY: This document is only available to specific recipients and should not be redistributed. The document is limited to access by Institutional Investors as defined under Section 304 of the Securities and Futures Act, Chapter 289 of Singapore.

 

United Kingdom: Jupiter Investment Management Limited, The Zig Zag Building, 70 Victoria Street, London, SW1E 6SQ, United Kingdom. The Fund is recognised by the FCA.

 

Other: Jupiter Asset Management Series plc, c/o Citibank Europe plc, 1 North Wall Quay, Dublin 1, Ireland.

 

In Denmark, this material is only intended for the exclusive use of Danish eligible counterparties or professional investors. Danish retail investors may not invest in the sub-funds mentioned in the material.

 

In Spain, Jupiter Asset Managemen Series plc is registered with the Comisión Nacional del Mercado de Valores (“CNMV”) under number 301. Jupiter Investment Management Limited is registered under number 2479. The prospectus, KIID and the latest economic reports can be obtained at no cost from registered distributors as per the list available on the CNMV web page.

 

In the Republic of Finland, this communication is not intended to constitute a public offer or an advertisement of securities.

 

In Italy, this material is for the exclusive use of “professional clients or professional investors” (as defined in Legislative Decree no 58/1998 by reference to Annex 3 of CONSOB Regulation no. 20307 of 2018) and its dissemination to retail investors/clients is prohibited.

 

In Luxembourg, this information does not constitute, under any circumstances, an offer or an invitation to purchase or sell shares in Luxembourg and does not and is not intended to constitute an offer of shares in the Grand Duchy of Luxembourg. It does not constitute legal, accounting, or tax advice.